The energy infrastructure market has been hit by what could be termed a perfect storm.
First, the need for new power facilities has rarely been greater. A huge amount of investment is needed to either replace or build new ones. In the Middle East alone it is estimated that US$200 billion will be required over the next ten years. In the UK, estimates for financing the recent round of offshore wind farms are in the area of £100 billion. In Africa a recent headline in the South African press reported the need for US$115 billion investment in the power sector.
With similar requirements in other parts of the world, the amounts required are truly staggering.
Secondly, increasingly the nature of the facilities needed are being dictated by climate change concerns. The political will behind new technologies is stronger than ever. In itself, this is of course needed and welcome, but the impact it has on costs is worrying. There is no escaping the fact that greener power projects cost more. And although financial incentives granted by governments or, for example, by the EU’s NER300 process are welcome, they barely scratch the surface of the funding requirements.
Thirdly, utilities globally are capitalconstrained and are under balance sheet pressure. We have seen many utilities announce strategic reviews and disposal programmes. Management teams at many utilities across the globe are having to make hard decisions as to which projects will go forward, which will be delayed and which will be cancelled.
Fourthly, boom has become bust in the banking sector, and there is a limit on the levels of bank capital available. Most bank balance sheets are constrained and are likely to be further affected by the requirements of Basel III. The requirements of Basel III may also restrict the kind of long term funding that is ideal for projects in the power sector. This is at a time when much of the short term funding (finance with tenors of three to five years) that was put in place in the immediate aftermath of the credit crunch is due to come up for refinancing.
Fifth, infrastructure funds and specialist funds (such as renewable energy funds) have not been able to raise fresh funding at levels approaching what they could raise during the boom period. There is hope that fund raising conditions will improve in 2011 for funds with a proven track record but we cannot expect that these funds will fill the capital gap.
Finally, power is not the only sector vying for attention. Other major infrastructure projects are providing serious competition when it comes to parting investors from their money, with Crossrail in the UK to name but one high profile example. Put these factors together, and many in the community feel we are in the midst of a perfect storm. Let’s have a look at some of the ways we can navigate it.
This briefing was first published in Infrastructure Journal on 12 November 2010